Enpro Inc. Q2 2025 earnings call

Thanks, Daryl, and good morning, everyone. Welcome to Enpro's Second Quarter 2025 Earnings Conference Call. I will remind you that our call is being webcast at enpro.com, where you can find the presentation that accompanies this call. With me today is Eric Vaillancourt, our President and Chief Executive Officer, and Joe Bruderek, Executive Vice President and Chief Financial Officer. During today's call, we will reference a number of non-GAAP financial measures. Tables reconciling the historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials. Also, a friendly reminder that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including those described in our filings with the SEC.

Also note that during this call, we will be providing full-year 2025 guidance, which excludes unforeseen impacts from these risks and uncertainties. We do not undertake any obligation to update these forward-looking statements. It is now my pleasure to turn the call over to Eric Vaillancourt, our President and Chief Executive Officer. Eric?

Thanks, James, and good morning, everyone. We appreciate your interest in Enpro as we discuss second quarter financial results and our improved sales and earnings outlook for the full year 2025. Now on to our second quarter performance. After my overview, Joe will provide a more detailed discussion of our quarterly results and perspectives driving our improved outlook for the balance of 2025. Enpro delivered another strong quarter, demonstrating the resilience of our business while continuing to invest in growth with discipline. We grew organic sales 6% in the second quarter, driven by 14.5% revenue growth in AST and continued top-line growth in sealing technologies, despite the difficult comparison to last year that we discussed last quarter.

In sealing technologies, sales increased about 2%, driven by strength in aerospace and food and pharma markets, firm general industrial markets, and strategic pricing initiatives more than offsetting continued weakness in commercial vehicle OEM demand. Timing of nuclear orders also impacted year-over-year performance. Adjusted segment EBITDA margin approached 34% for the quarter. We continue to identify opportunities for incremental growth throughout the sealing technologies segment and are focused on expanding our market reach by leveraging our differentiated technological capabilities and applied engineering expertise.

We are focused on capturing opportunities in key markets such as aerospace, sustainable power generation, including nuclear, food and pharma, and compositional analysis, where our differentiated capabilities can drive long-term profitable growth. We continue to invest in incremental capacity expansion, supporting new platforms and enhanced strategic marketing and engineering capabilities to position the segment to deliver on our targeted mid-single-digit organic revenue growth rate.

More than 60% of the segment's revenue is tied to the aftermarket, with specified positions providing critical process and safety functions for our customers. We continue to be delighted with the best-in-class performance of the sealing technologies segment, which we expect to perform well in a variety of macroeconomic environments. In the advanced surface technologies segment, sales increased more than 14%, led by growth in leading-edge precision cleaning solutions, optical coatings, and improved demand for in-chamber semiconductor tools and assemblies. Operating expenses supporting growth in new platforms and transactional foreign exchange headwinds crimped operating leverage during Q2, which Joe will discuss later. We continue to make targeted organic investments at AST and expect execution of our growth and optimization plans to drive high single to low double-digit revenue growth with improved profitability over time.

We continue to believe that this segment can generate 30% adjusted EBITDA margins, again, over time as growth programs and optimization playbooks are implemented. Our balance sheet remains in excellent shape. Increased capacity from our recent debt finance refinancing activities, along with consistently strong free cash flow generation, provide us with ample flexibility to execute on our forward growth strategy while pursuing strategic acquisitions that meet our rigorous strategic and financial criteria. Our colleagues across the organization are empowered as we embark on the first year of Enpro 3.0, our multi-year strategy for the next chapter of the company's evolution. With Enpro 3.0, we are accelerating both personal and profitable growth. In our view, these goals are equally important and inextricably linked. At the halfway point here in 2025, our teams are motivated with individual development plans in hand that drive their own personal and professional growth.

We are tasking our employees to chart their own development paths, to pursue courses to expand their work knowledge in areas that inspire and build business acumen, engage in helpful activities, and practice awareness, problem solving, and communication techniques that enable our colleagues to grow and thrive within and outside of our organization. I would like to thank our colleagues across Enpro who embrace our way of working and partner with our customers to solve important processing problems using our technological capabilities and applied engineering expertise. Developing relationships with trust and reliability with our customers enable us to continue producing exceptional results. There has never been a better part of Enpro. I will now pass the call over to Joe to discuss our quarterly results in greater detail and discuss the drivers of our improved outlook for the balance of the year. Joe?

Thank you, Eric, and good morning, everyone. To the halfway mark of 2025, we have delivered strong results, and our improved outlook for the year reflects the differentiation of our products and solutions, technology leadership, and process know-how, customer intimacy, as well as the balance inherent in the Enpro portfolio. Turning to our results for the second quarter, sales of $288.1 million increased 6%, driven by continued strong performance in the sealing technologies segment and a 14.5% increase in AST. Second quarter adjusted EBITDA of $71.1 million declined 3.9% year over year. Total company adjusted EBITDA margin was 24.7%. Increased operating expenses supporting growth, transactional foreign exchange headwinds, which I will discuss in a moment, and increased incentive compensation accruals drove the slight year-on-year decline in total adjusted EBITDA.

Corporate expenses of $12.1 million in the second quarter of 2025 increased from $10.5 million a year ago, driven primarily by higher incentive compensation accruals and increased health insurance costs. Adjusted diluted EPS of $2.03 decreased slightly from $2.08 last year, primarily driven by the factors behind adjusted EBITDA performance in the quarter. Moving to a discussion of segment performance, sealing technologies sales increased 1.9% to $187.5 million. Strength in aerospace and food and pharma applications, firm general industrial performance, and strategic pricing more than offset continued slow commercial vehicle OEM demand and mix associated with timing of nuclear orders compared to last year. For the second quarter, adjusted segment EBITDA margin was 33.8%, down from last year's high watermark of 35.5%. Sequentially, sealing segment margin expanded 110 basis points.

Continued demand weakness in commercial vehicle OEM markets, timing of nuclear orders year over year, as well as $1.9 million of transactional foreign exchange headwinds, given the weakening of the U.S. dollar, were the primary factors affecting segment profitability during the second quarter. We are very pleased with the first half performance in sealing, with adjusted segment EBITDA margin exceeding 33% through June. We expect solid performance to continue as our teams focus on adjacent market expansion and incremental capacity investments, as well as continued value pricing, 80/20, and cost discipline. Turning now to advanced surface technologies. Second quarter sales increased 14.5% year over year to $100.9 million. While overall semiconductor capital equipment spending remains choppy, we saw continued growth in leading-edge precision cleaning solutions and in optical coatings, in addition to improved demand for certain in-chamber semiconductor tools and assemblies.

For the second quarter, adjusted segment EBITDA increased nearly 4%. Adjusted segment EBITDA margin was 19.6% versus 21.7% last year. Operating leverage was absorbed during the quarter, primarily due to $2.5 million of higher operating expenses supporting future growth initiatives and transactional foreign exchange headwinds totaling $2.8 million. In the first half of 2025, AST's adjusted segment EBITDA margin was 20.7%, with increased operating expenses supporting growth programs totaling $4.3 million and $3 million of unfavorable transaction FX. As Eric noted, we continue to make targeted growth investments in areas where we have the strongest competitive advantages, while implementing our continuous improvement playbooks to drive enhanced profitability and achieve our longer-term goals for AST segment performance. Turning to the balance sheet and cash flow.

Our balance sheet remains strong, and we have ample financial flexibility to execute on our long-term organic growth initiatives while considering select acquisitions that fit our rigorous strategic and financial objectives without the use of excess leverage. On May 29th, 2025, we successfully completed an offering of $450 million of 6.8% senior notes due in 2033. A portion of the net proceeds of the newly issued senior notes was used to fully redeem the outstanding $350 million of 5.25% senior notes due 2026. In addition, we completed an amendment to our credit agreement on April 9th, which doubled the size of our revolving credit facility to $800 million. On June 30th, revolver capacity was $770 million.

As a result of these refinancing and debt repayment actions, we now expect lower net interest expense of $26 million-$28 million for 2025 versus our previous expectation of $34 million-$36 million. We ended the second quarter with net debt of $364 million, resulting in a net leverage ratio of 1.4 times, trailing 12-month adjusted EBITDA. Free cash flow in the six months ended June 30th was $52.8 million versus $35.5 million last year. Higher net income driven by strong operating performance, working capital management, and lower cash interest expense were the primary drivers of free cash flow growth. We continue to expect capital expenditures to be around $50 million this year, as we invest in future growth opportunities across the company at accretive margin and return thresholds.

Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the second quarter, we paid a $0.31 per share quarterly dividend, with year-to-date payments totaling $13.2 million. We also have an outstanding $50 million share repurchase authorization expiring in October 2026. Turning now to guidance, we are raising full-year 2025 guidance and now expect Enpro sales growth to be between 5% and 7% versus our previous expectation of low to mid-single-digit revenue growth. Based on our better sales outlook, we now expect adjusted EBITDA in the range of $270 million-$280 million and adjusted diluted EPS in the range of $7.60-$8.10. Previously, we expected adjusted EBITDA in the range of $262 million-$277 million and adjusted diluted EPS of $7-$7.70.

The normalized tax rate used to calculate adjusted diluted EPS remains at 25%, and fully diluted shares outstanding are 21.2 million. The primary factors driving our increased guidance ranges are a stronger outlook for aerospace applications, continued strength in food and biopharma markets, and slightly improved orders in general industrial markets and sealing technologies. We continue to expect weak commercial vehicle OEM demand for the remainder of this year in the segment. Altogether, we expect sealing to show top-line growth in the mid-single-digit range for the year, with segment profitability remaining at the high end of our previously communicated range of 30% plus or minus 250 basis points. In advanced surface technologies, incrementally better demand for in-chamber semiconductor tools and assemblies, and continued strength in leading-edge precision cleaning solutions are now expected to drive advanced surface technologies sales growth in the high single to low double-digit range year over year.

Despite continued investments supporting growth programs and transaction FX headwinds, we expect full-year advanced surface technologies segment profitability to again exceed 20%. Tariff exposures remain minimal and manageable as we move into the second half. Our supply chain teams are executing with agility and resilience, well-prepared to perform in a variety of macroeconomic environments. I will now turn the call back to Eric for closing comments.

Thank you, Joe. We are eager to continue demonstrating our leading-edge capabilities and differentiated products and solutions that deliver significant value to our customers and drive long-term profitable growth. Our development programs that encourage our colleagues to grow both personally and professionally in the early days of Enpro 3.0 will help unlock the full potential of our team to advance our strategy and create value for all stakeholders. I would like to thank our shareholders for their support as we embark on the next phase of our value-creating strategy, Enpro 3.0. Thank you for your interest in Enpro, and we'll now welcome your questions.